A Conference Note From Jon Gates

Railroads and shippers are seeking direction from Washington on NAFTA, tax reform and the infrastructure bill while maintaining optimism in the still-competitive freight market.

Presenters at this year’s North American Rail Shippers (NARS) 2017 Annual Meeting struck an optimistic but realistic tone on the state of the rail business. Nearly every railroad that presented mentioned NAFTA, tax reform, the infrastructure bill and Mexico’s importance to the United States as a trade partner. The talk of opportunity in Mexico was focused on the continued growth of auto manufacturing and, in light of Mexico’s now-open energy market, the ability to export refined products to Mexico.

North American energy, particularly frac sand, and grain were cited as two of the stronger verticals, but there was some acknowledgement grain exports could face competition from a strong South American crop. Railroads spoke of a better environment, but Union Pacific Corp. CEO Lance Fritz said the market “feels like four-fifths promise and one-fifth book of business” with all eyes on Washington. Anyone hanging their hat on the hopes of a crude by rail resurgence might want to look elsewhere, as that market was described as “a flash in the pan” by an industry consultant. Exports of refined products, LPGs and plastic pellets generated much talk of opportunity for railroads, but the lack of clarity from Washington on a potential modernization of NAFTA and tax reform has everyone still riding the brakes.

Conference Notes:

Further labor issues at West Coast ports will likely speed up the continued bleed of volume to other ports

Railroads tout “user pays” and expanded fuel tax to pay for roads and bridges as part of infrastructure bill

Mexico's importance as the largest consumer of U.S. auto parts and farm products was highlighted, and Mexico’s continued demand for natural gas, diesel, gasoline and other refined products cited as growth opportunities

Intermodal’s importance and ability to take share from truckload was emphasized; Berkshire Hathaway Inc.'s Burlington Northern highlighted its new five-day-a-week IM service from the Pacific Northwest into Fort Worth, which is one day faster than TL

Strong frac sand demand, steady growth in LPG volumes and coal at a “new normal” of 30% market share for thermal generation were highlighted by two speakers

Driver schools only 50% full, the looming driver shortage, and tightening capacity of at least low single digits, but hopes of high single digits due to upcoming ELD regulations, were discussed by a railroad

This transmission was produced for the exclusive use of OTR Global LLC (OTR), and may not be reproduced or relied upon, in whole or in part, without OTR’s written consent. The information herein is not intended to be a complete analysis of every material fact in respect to any company or industry discussed. OTR Global LLC is an investment advisor subsidiary of OTR Global Holdings LLC. OTR Global Trading LLC is a registered broker dealer subsidiary of OTR Global Holdings LLC. The affiliated companies of the OTA Financial Group LP and/or its principals, employees, clients or researchers may have an interest in the securities of issuers discussed herein or in securities of other issuers in other industries. OTR, OTR Global Primary Intelligence and OTR Field Force are trademarks owned by OTR Global Holdings II Inc.